Retirement: Retirement is that goal that is so distant we can barely see it. We look enviously at our coworkers who can count their approach to The Big Day in hours or weeks, rather than years or decades. As much as we love this job, the reality is, at some point, we will hang up the gun belt, bid farewell to the polyester uniforms, stroll out of the roll call room and traipse off to greener pastures with the new gold watch. In fact, many officers see a good retirement as a benefit of the job. Law enforcement is one of the few professions remaining where you can get a traditional pension and retire well before the standard age of 65 (or 67).
A good, comfortable retirement requires careful planning on your behalf. If you want to enjoy your retirement years sitting in a fishing boat, wandering a beach or cruising in an RV, you have to plan years in advance to ensure you have the money to do that. Most police officers rely on a government pension for their retirement years. The pension is a great benefit for retirees, but it is not completely without risk.
What is a Pension?
The traditional law enforcement pension is formally known as a defined-benefit plan, or DBP. While the DBP used to be the mainstay of retirement planning for all professions, very few private employers continue to offer them. Government entities are the last stronghold of the DBP. A DBP promises a retiring employee a "defined benefit" regardless of any other factors. The amount he contributed over the years does not matter; neither does the performance of the stock market and underlying investments. It is your basic, "If you retire after 25 years, we'll pay you X percent of your salary until you die."
Pensions are disappearing, literally and figuratively, because the costs and risks have become astronomical. Like people, companies and governments don't plan well for events that may be 20, 30 or even 40 years away. As a result, pension funds are woefully underfunded. After all, any corporate mogul would rather build a new headquarters than sink $40 million into a pension fund he can't touch. And every politician would much rather build you a new bridge with his name on it than pour money into a pension that can't vote.
Proper funding is what keeps pensions healthy. Pension boards take the contributions from the employee (you) and the employer (your agency) and invest that money. They buy stocks, bonds, options and other financial tools. They try to choose investments that will appreciate, or grow in value. The investment can grow in value, such as a stock price going up, or pay reliable income, such as a government bond. By balancing these investments and properly diversifying (that is, spreading out risk), the Pension Board hopes to turn all the money it receives into a nice big nest egg from which it can write you regular checks once you retire.
But the plan only works if adequate funding leads to an adequate return on investment. Failing to put enough money into the pension means there is not enough to invest properly. Earning too low a return on the investment means the nest egg doesn't grow as fast as it needs to. Both of these lead to what is kindly called "unfunded liabilities." That means that the pension fund has more retirement years and payments in the future than it can fund. Oops.
Pension Plans and Risks
If you are paying into a pension system, you undoubtedly know how your retirement plan is formatted. Many areas have a Rule of 75 or Rule of 85, meaning your age and years of service have to add up to 75 or 85. In Kentucky, we have a straight 50% after 20 years, with no minimum age. Theoretically, a person could enter the academy at 22 years old and be retired on a nice pension before his midlife crisis hits. A 42-year-old retiree could draw pension benefits for 30 or 40 years, which is an immense expense to a pension fund. That is why so many pensions how have minimum retirement ages and years of service. The funds are trying to make the money they have on hand last longer.
Now, for those close to retirement, the instability of the pension system is probably not a personal crisis. However, for those just starting a law enforcement career, the pension crisis should be a concern. The stability of your pension depends on politicians placing their financial obligations to you over those of special interest groups or their own election. That means you have to trust that politicians will make their obligatory contribution to your pension fund rather than build a new medical center that treats the latest illness touted by the media and is run by a campaign contributor. Remember: tax dollars are limited. People vote for politicians that help sick people. Contributors send money to help with re-election. Pension funds don't vote. A little nervous now, huh?
The reality is that most governments know they cannot abandon their pension obligations. Aside from the wholesale riot it would cause with employees, it also would shake confidence in the other obligations of the government... that is, the bonds they issue to build police stations, buy fire trucks, pave roads, etc. Therefore, the likelihood of a complete collapse of your pension fund is pretty low. But, it would be reasonable to expect changes in the program, especially for new hires. Younger members could even see decreases in their promised payments.
Planning for Retirement
Your pension is reliable as a nice retirement package. Since it relies on politicians to fund it properly, you are probably best off diversifying your retirement plans... that is, not placing all of your proverbial retirement eggs in just one plan. Most government agencies offer a deferred compensation plan, which allows you to invest pre-tax income into a personal retirement account. These are done normally in 401K or 457 plans, which get their names from the segments of the tax code that established them.
A deferred comp plan is a great idea for two reasons as you look to retirement. First, by planning on your own, you help reduce the risk of your government pension being reduced or, God forbid eliminated, due to funding problems. Second, it gives you a great supplement to your pension. Depending on your pension, you can plan on 50% to 80% of your salary upon retirement. Normally, this is a good ratio, as older people do not have as many expenses as younger people. Children are normally self-sufficient by the time their parents retire and homes are mortgage-free. However, police officers have the ability to retire much earlier than our private sector friends do. That means we can be retired yet still have many of the expenses associated with working people: kids in college, mortgage payments, etc. By joining a deferred comp plan, you can ensure that you have additional income available for these expenses. You can also improve your quality of life as a retiree.
Don't be weary of these plans, formally known as defined-contribution plans (DCPs). The DCP is how the vast majority of Americans must plan for retirement. The retirement income from the DCP is not guaranteed, but is directly related to the amount you fund it and how well your investments perform. A person saving $100 a month in a DCP could have over $200,000 saved in 30 years... and that's on top of your pension!
Conclusion
Police officers undertake the profession for a number of reasons, but a high salary is not one of them. The future promise to officers is that they can retire on a pension with a fixed, known income. The pension system is unstable, mostly due to underfunding by governments. While this is a risk mostly to future employees, it could affect current employees.
By planning for retirement on your own, you can help protect yourself as well as improve your lifestyle upon retirement. The best way to do this is through deferred comp programs, or defined-contribution plans. The DCP is riskier than the pension, but still serves as an excellent program for the officer actively planning to enjoy retirement.
